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mediumFinancial Analyst interview question

What is the difference between sensitivity analysis and scenario analysis, and how do you show them in Excel?

What the interviewer wants to hear

  • Sensitivity changes one or two inputs at a time
  • Scenario changes several linked assumptions together
  • Data tables for sensitivity; a scenario switch with CHOOSE or INDEX for scenarios
  • Helps identify key value drivers and downside risk
  • Keep assumptions consistent within a scenario

Model answer

Sensitivity analysis changes one input, or two at a time, while keeping everything else fixed, to see how much the output moves. For a DCF I might show value per share across a grid of WACC and terminal growth using a two-way data table. It tells me which drivers matter most. Scenario analysis changes several assumptions together in a consistent story, such as a downside case with lower volume, weaker prices and higher raw material costs at the same time, because in real life these often move together. In Excel I keep base, upside and downside assumptions in columns on an input sheet and use a scenario switch cell with CHOOSE or INDEX so the whole model picks up the selected case. I present the results as a small table of key outputs per scenario, so management sees both the range and what would have to happen for each case.

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